State Senate President Pro Tem Darrell Steinberg, D-Sacramento, talks to reporters after leaving a meeting at the Governor's office to discuss California's water problems at the Capitol in Sacramento., Calif., Friday, Oct. 9, 2009. Legislative leaders met with Gov. Arnold Schwarzenegger, Friday, to try to strike a deal on how to overhaul the state's aging water system. (AP Photo/Rich Pedroncelli)

Californians would pay higher income taxes and more to license their vehicles, but the state sales tax would be slashed under a new plan unveiled by Democrats in the Legislature to solve a multibillion-dollar budget deficit.

The plan, the first substantive development on the budget since the fiscal year began more than a month ago, would mean several hundred dollars more in costs for average taxpayers, though Democratic leaders said that with a reduced sales tax and deductions on federal tax filings average Californians actually would come out ahead.

"We put forward this proposal with the hope and expectation that it will lead to budget closure sooner rather than later," said Senate President Pro Tem Darrell Steinberg, D-Sacramento. "This is not a budget to celebrate, it is a budget of necessity."

Republicans, including Gov. Arnold Schwarzenegger, criticized the plan and disputed whether people would pay less overall.

At an event in Fresno, Schwarzenegger said, "The middle class - the last thing they need right now is a tax increase."

The governor reiterated his pledge to "never sign a budget" that includes a tax increase.

While Schwarzenegger has put the deficit at $19 billion, Democrats are using different estimates of what revenues will come into the state. They peg the deficit at $17.9 billion.

The plan would mean higher taxes for 57 percent of filers by 2012, said H.D. Palmer, spokesman for the Department of Finance. He also said the changes would make the state's tax revenue more volatile and leave people with sticker shock when they pay taxes next year as they would not have time to adjust the amount withheld from paychecks.

A starting point

However, Schwarzenegger said he remained optimistic that leaders would solve the overall problem. His spokesman, Aaron McLear, said a unified Democratic proposal will mark the beginning of substantive negotiations for a solution to the deficit.

Under the proposal, increases in personal income taxes and the vehicle license fee set to expire next year would continue, and income taxes would rise by 1 percentage point for all tax brackets save one. The wealthiest Californians, who already have the highest tax rate, would pay the same as they do today.

The vehicle license fee would increase to 1.65 percent. It currently is at 1.15 percent and is scheduled to drop to .65 percent next year.

With those increases, the average tax filer making $60,000 per year would see a $473 increase in personal income taxes and a $118 increase in the vehicle licensing fee, though those would be offset by $677 in sales tax savings, according to estimates calculated by Democrats.

The state sales tax would decrease from 6 percent to 3.5 percent by next year.

Democrats also argue that the increases could be deducted on federal taxes, though doing so means filing an itemized tax return. Forty percent of Californians file itemized federal tax returns, according to the state Franchise Tax Board.

The tax proposal would cut about $1.7 billion from the deficit this year and generate more than $3 billion by 2015, according to Democrats. In the overall proposal, Democrats also included things they had previously called for, including an oil severance tax and delaying corporate tax breaks.

Another substantial proposal by Democrats is the suspension of Prop. 98, the voter-approved initiative that sets funding for education. Even with the suspension, Democrats are proposing to spend nearly $4 billion more than the governor has proposed.

GOP leader's view

Senate Minority Leader Dennis Hollingsworth, R-Murrieta (Riverside County), said Republicans don't want to see the deep cuts that were proposed by the governor, but that those spending reductions are a necessity to get to a budget solution that will "stand up" all year. He called the Democrats proposal "fiscally irresponsible," adding that it would hurt private-sector jobs.

"The interesting thing about what's going on here today is that usually, as budget negotiations progress, you see that the two sides tend to come together. Unfortunately, with the proposal presented today by the Democrats, they are moving the two sides farther apart," Hollingsworth said. "The Democrats' answer today is to propose taxes - taxes that would increase the income tax on every Californian, that would increase the tax on drivers, that would repeal job-creating tax incentives."

As the back-and-forth over the budget progresses, the state moves closer to repeating emergency measures like IOUs that were necessary last year. Controller John Chiang on Tuesday said not having a budget prevents him from paying $2.1 billion in bills for education, trial courts and vendors, among other things.

Chiang has warned that the state will run out of cash in September without a budget. Before that happens, he said, he would have to start issuing IOUs.

Dems' tax plan to trim deficit

Changes: Increase personal income taxes by one percentage point for most Californians; increase the vehicle license fee to 1.65 percent from 1.15 percent of the vehicle's value; and decrease the state sales tax from 6 percent to 3.5 percent.

Effect on you: For an average person making $60,000 a year, income taxes would increase $473 annually, the vehicle license fee would increase $118 a year, and there would be a $677 savings in sales taxes.